Selected Essays of James Tobin
Chapter 3: Financial globalization: can national currencies survive?
3. Financial globalization: can national currencies survive?* The largest private bank in a small country fails. Frightened depositors and creditors desert this country, its banks, and its currency, and its central bank’s plea for foreign assistance garners little response. Aﬀected creditors in neighboring countries, banks and central banks alike, scramble for internationally liquid assets. Interest rates zoom up everywhere, loans are called or not renewed, economic activity sinks, and unemployment quickly rises to politically hazardous rates. The managers of the world monetary system, central bankers individually and collectively, strive above all to maintain the credibility of the system and conﬁdence in existing currency rates. But the eﬀects of their deﬂationary policies on business conditions instead destroy conﬁdence. In the end country after country has to abandon its commitments to redeem its currency at the promised price. In country after country, then and only then does economic recovery begin, and it takes many years. The place is not East Asia in 1997–8 but Europe and North America in 1931. The bank was the Credit Anstalt in Vienna. The monetary system was the gold standard, as revived after a hiatus due to World War I. Central bankers, ﬁnance ministers, prime ministers, and presidents put defense of the gold values of their currencies above all else. Weimar Germany maintained the gold content of the mark but rationed its gold reserves. Its deﬂationary policies in 1931–2 – high interest rates, tax increases, no relief or work for...
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